Addressing threats to health care's core values, especially those stemming from concentration and abuse of power. Advocating for accountability, integrity, transparency, honesty and ethics in leadership and governance of health care.

Friday, August 16, 2013

Should We Cry for Non-Profit Hospital System CEOs Paid Less than For-Profit CEOs?

Two recent articles (here and here) in Modern Healthcare providing an update on the compensation of CEOs of non-profit hospital systems raised new questions.

The CEOs' Compensation

The first article documented the rich compensation of the top paid CEOs of non-profit US hospital systems. A summary of their total compensation:

The articles in combination provided the usual talking points as justification for this compensation. We have noted that nearly every attempt made to defend the outsize
compensation given hospital and health system executives involves the
same talking points. We first listed the talking points here, and then provided additional examples of their use here, herehere,here and here. They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant.

So true to form, we found in the Modern Healthcare articles these justifications of the executives multimillion dollar pay.

Competition

In general,

In interviews, health system directors and executives at the systems
where these top-paid executives work defended the compensation packages
as necessary to remain competitive....

Re UPMC

UPMC spokeswoman Susan Manko described his [that is, Romoff's] pay as competitive for an institution of UPMC's size and complexity.

Re Novant

Novant spokeswoman Kati Everett said Novant follows IRS rules that call for pay to be compared against the market....

Re Sutter

[Sutter Health board of trustees member and chair of the compensation committee Andy] Pansini said the Sutter board set the CEO's salary halfway between the lowest and the highest amount he could earn elsewhere.

Also,

He said Sutter's board relies heavily on consultants to compare Fry's compensation against the market.

Retention

Re Sentara

'Mr Bernd's compensation takes into account his 40-year tenure of leadership at Sentara, with nearly 20 serving as the organization's top executives.

The articles also introduced one new element. Some defenders of non-profit hospital CEO compensation explicitly argued that should take into account compensation of for-profit CEOs.

This argument was made by "Jill Horwitz, a law professor at the University of California at Los Angeles,' who had "defended paying not-for-profit healthcare executives market rates."

She also noted that not-for-profit systems have to compete with the for-profit sector for top talent. 'This idea that people should be donating their labor is a misunderstanding of charity.'

Defenders of CEO compensation at specific health systems also made similar points. For example, a Kaiser Permanente spokesman explicitly compared his CEO's pay to that given to CEOs of for-profit health plans,

Kaiser spokesman Won Ha, in a written statement, said Halvorson's pay
falls short of the average compensation of $14 million, not including
option exercises, earned by CEOs of the 12 largest for-profit healthcare
systems, which had average 2011 revenue of $37 billion.

'Compensation paid to senior management is substantially less than that of many for-profit health (plans),...'

Also, re Sutter,

[board committee chair Pansini noted that when comparing his CEO's pay against the market] That comparison includes other executives of similar not-for-profit health systems, and to a lesser degree, of for-profit systems.

Summary: An Extension, but Still no Clear Justification for the Talking Points

The talking points to explain executive compensation in health care are used again and again. They never seem to be
publicly challenged. However, they should raise some obvious questions.

The argument about competition raises several obvious questions. Why
should the top hired managers' pay be only compared to other top
managers, and not explicitly to other employees? Even if the comparison
is restricted to other top managers, how can they be used for those at
the top of the pay scale for
non-profit hospital system CEOs? How these CEOs' compensation
could be dubbed merely competitive, much less "halfway between the
lowest and highest amount he could earn elsewhere," is not clear.

The
retention argument begs the questions of whether any of these managers
is really likely to leave, whether they really would be attractive to
other organizations at the same or even higher pay, and whether it would
really be difficult to find replacements.

The
brilliance argument raises the question of how brilliance is defined.
Given that it is almost unheard of for a fan of current compensation
practices to dub any top manager anything less than brilliant, the
obvious question is how can CEOs, like the children of Lake Woebegone,
all be above average?

Furthermore, the talking points seem to be in the process of extension, which should raise even more questions.

Defenders of CEO pay, usually "spokespeople" or members of boards of trustees, often cite the need for "competitive" pay. They usually are not clear about with whom they are competing. Now it seems to be more popular to say that non-profit health care organizations are competing with for-profit corporations, despite the ostensible difference in their natures. Non-profits are supposed to have a charitable nature and function, to have some sort of mission that serves the greater good. To support that apparently benevolent purpose, in the US they are exempt from certain taxes, are are able to receive charitable contributions which in turn earn deductions for their givers. For-profit corporations are in business ostensibly for their owners.

In addition, by now asserting that the non-profit CEOs should be likened to the CEOs of for-profit corporations, the expanded talking points highlight questions that have been raised about how these hired managers are paid. We have previously discussed some pithy critiques of American practices of executive compensation (look here and here.)

CEO compensation as a multiple of the pay of the average worker has risen 10-fold since the 1960s (see this chart). As a consequence, the top 1% and 0.1% of the US income distribution is increasingly and disproportionately made up of executives, that is hired managers, (see the recent article by Bivens and Mishel[1] for a summary). Per the article, the income of top corporate executives has grown even faster than that of other members of the top 0.1%. It seems evident that these rates of growth cannot be explained by increases in the financial performance of their companies. Furthermore, while it appears that compensation of US health care corporate executives has grown as fast as their brethren, there is no data that US health care has improved at anything like a similar rate. It may have hardly improved at all. A recent JAMA article is just the latest example of studies showing that US health is lagging that of other developed countries, although the US spends far more per capita on health care.(2)

Furthermore, there is more and more criticism about how the compensation of top hired managers is set. Steve Denning's blog post in Forbes summarized a 2012 Harvard Business Review article(3) suggesting that "market-based" compensation schemes mistake top managers for innovative entrepreneurs, when they are mainly simply "bureaucrats"; reward managers for luck rather than skill; and is "inversely related to shareholder returns."

Finally, Elson and Ferrere critiqued the mechanics of how compensation is set. In particular, while boards of directors may attend to data on compensation of CEOs at other, supposedly comparable corporations, they almost always "choose a package that is in the 50th, 75th, or 90th percentile of their target peer group. Targeting levels below the 50th percentile is rarely, if ever done." Thus, boards nearly always act as if their CEO is above average, while by definition, most CEOs cannot be above average. Why do boards commit this folly? The authors postulated that suggesting the CEO is less than average "may raise concerns over the executive's position within the company...." Perhaps boards also fear that labeling the CEO below average may be an admission of below average governance.

Desai suggested that the perverse incentives created by current schemes to compensate managers were a major cause of the 2008 financial meltdown. As Dennings wrote,

despite the constraints to change, the
overcompensation of the C-suite and the financial sector is not
sustainable. It causes serious misallocation of capital and talent,
repeated governance crises, rising income inequality and an overall
decline of the US economy. It obviously cannot continue, if only
because, as Margaret Thatcher used to say in a different context, 'Sooner or later you run out of other people’s money'

Clearly, in the health care context, the results could be even worse. Perverse executive compensation could not only lead to misallocation of capital and talent in health care, it could lead to bad health care decisions that could harm patients' and the public's health. However, there seems to be almost no discussion of, much less research about, much less policy changes addressing perverse incentives for health care managers and their likely ruinously bad effects on people and patients.

Such discussion and research is a prerequisite to true health care reform, which would require such policy changes.

Meanwhile, I hope at least the next time huge compensation of some health care managers is announced, someone asks the next set of questions after the usual talking points are made.

On www.SemmelweisSociety.net we post the way to use IRS Form 990 to find the salaries of the administrators of hospitals near you, so you can decide whether enough nonprofit-profit is protecting patients instead of profits.

We are all patients. Why should a nonprofit hospital-administrator be permitted to dun poor people while we pay him more than POTUS?

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